SEC-Lehman Probe, Cross-Border Card Fees, Fed: Compliance

May 25 (Bloomberg) -- U.S. Securities and Exchange
Commission investigators have concluded their probe of possible
financial fraud at Lehman Brothers Holdings Inc. and determined
that they probably won’t recommend any enforcement action
against the firm or its former executives, according to an
excerpt of an internal agency memo.

The agency has been grappling with the case for more than
three years amid questions from lawmakers and investors as to
whether Lehman misrepresented its financial health before filing
the biggest bankruptcy in U.S. history in September 2008.

Under a heading reading “Activity in the Last Four
Weeks,” the undated document reads, “The staff has concluded
its investigation and determined that charges will likely not be
recommended.”

SEC officials didn’t dispute the authenticity of the memo
or its contents.

Senior officials have been reluctant to formally close the
matter even though investigators found a lack of evidence of
wrongdoing, according to people with direct knowledge of the
matter. John Nester, an SEC spokesman, said the case remains
under review.

“As the chairman said, it’s still under review and no
final decision has been made,” Nester said in an e-mail,
referring to an earlier statement by SEC Chairman Mary Schapiro.

Compliance Policy

Facebook IPO Scrutiny Forcing It to Grow Up Inside Washington

Congressional questions about Facebook Inc.’s initial
public offering are forcing its nascent lobbying operation to
play defense as it builds the political support companies need
before coming under scrutiny.

U.S. House and Senate committee officials said May 23 their
staffs are gathering information about the social networking
company’s offering and that the topic may come up at
congressional hearings.

Lead underwriter Morgan Stanley may face regulatory review
over claims an analyst shared negative news about Facebook with
institutional investors before the offering, Richard Ketchum,
chairman and chief executive officer of the Financial Industry
Regulatory Authority, said May 22.

Facebook, which first registered to lobby in 2009, is
playing catch-up to other technology companies such as Google
Inc. and Microsoft Corp. that have more established efforts in
Washington.

Google Inc. spent $5 million in the first quarter of this
year, and Microsoft Corp. spent $1.8 million during the same
period. Facebook reported expenditures of $650,000 from January
to March, more than double the $230,000 it spent during the same
period a year earlier, Senate records show.

Its annual lobbying expenses expanded to $1.4 million in
2011 from $207,878 in 2009.

Facebook lobbied on more than 20 bills in the first quarter
of this year, many of them focused on online privacy and
cybersecurity, Senate records show. The company lobbied the
House and Senate, the White House, the Federal Trade Commission,
Commerce Department and other federal agencies.

Securities and Exchange Commission Chairwoman Mary Schapiro
said her agency may review the offering.

Andrew Noyes, a Facebook spokesman in Washington, declined
to comment on the congressional activity.

For more, click here.

George Says Directors Should Meet Fed Standards or Resign

Federal Reserve Bank of Kansas City President Esther George
said that directors at the Fed’s regional banks who don’t meet
the central bank’s standards for impartiality should step down.

“Bankers should serve,” George said in a statement
released yesterday by the Kansas City Fed. “There are high
standards that apply to Reserve Bank directors, and when an
individual no longer meets these standards, the director resigns
voluntarily to allow someone who does meet the criteria to
serve.”

The directors at the 12 regional Fed banks are under
renewed scrutiny following a $2 billion trading loss at JPMorgan
Chase & Co. that revived concern that its regulator, the New
York Fed, is too cozy with Wall Street. JPMorgan Chief Executive
Officer Jamie Dimon is one of three bankers sitting on the board
of the New York Fed.

Elizabeth Warren, a Democrat and U.S. Senate candidate from
Massachusetts, has called for Dimon’s resignation, while
Treasury Secretary Timothy F. Geithner said last week that
having bankers on the board of the New York Fed creates a
“perception” problem. Legislation was introduced in the Senate
May 22 that would remove banking industry executives from the
regional Fed banks’ boards of directors.

George defended the role of bankers on the Fed regional
bank boards because they “provide critical, in-depth
information about economic conditions in their communities.”

For more, click here.

Underwriters Paying to Pass Bond Issues Face Regulatory Scrutiny

Underwriters that fund bond-authorization campaigns and
then collect fees from approved debt sales are among the
unresolved pay-to-play issues in the $3.7 trillion municipal
bond market that will come under rulemaker scrutiny.

The Municipal Securities Rulemaking Board, after collecting
data on dealer contributions to bond campaigns for two years, is
starting to examine the need for restrictions based on such
contributions, said Ernesto Lanza, deputy executive director and
chief legal officer.

Hiring an underwriter based on whether it supports a
campaign rather than its ability to market bonds can lead to
issues from mispricing, which can hurt investors, to higher fees
and borrowing costs for taxpayers. The rulemaking board’s focus
is on ensuring investors are protected, Lanza said by telephone.

The MSRB has banned would-be underwriters from giving to
most campaigns for elected officials who could influence the
award of bond sales. Banks have been divided over whether they
should be allowed to support drives in favor of referendums
authorizing debt issues that they later underwrite. Some say it
creates the appearance of undue influence, while others say it
merely helps issuers win the votes and finance needed projects.

Making such contributions is more widespread among smaller
underwriters, according to disclosure filings with the
rulemaking board.

For more, click here.

Compliance Action

Ex-SEC Attorney Barred for Year Over Stanford Ethics Lapse

The U.S. Securities and Exchange Commission barred one of
its former enforcement officials from practicing before the
agency for one year over claims he violated federal conflict-of-interest rules.

Spencer Barasch, who participated in the SEC’s
investigation of R. Allen Stanford’s $7 billion Ponzi scheme,
performed private legal work for Stanford Group Co. about a year
after leaving the agency even though the agency’s ethics office
had told him he was prohibited from doing so, the SEC said in a
statement yesterday. Barasch consented to the bar without
admitting or denying the allegations.

Stanford was convicted March 6 of 13 criminal counts
stemming from an investment fraud built on bogus certificates of
deposit at his Antigua-based Stanford International Bank sold
through his U.S. brokerage. The investigation became a black eye
for the SEC after an inspector general report found the agency
had been aware of a possible fraud for more than a decade.

Barasch was associate director in the SEC’s regional office
in Fort Worth, Texas, from 1998 to 2005, according to the
agency.

“In order to avoid the expense and uncertainty of
protracted litigation, Spence and the government have entered
into a settlement that fully and finally resolves this matter,”
Paul Coggins, an attorney for Barasch at Locke Lord LLP, said in
a statement.

Barasch, who now practices law at Andrews Kurth LLP in
Houston, agreed earlier this year to pay a $50,000 civil fine to
the Justice Department for violating ethics rules.

Deutsche Bank Fined by Nymex for Gas Position-Limit Violation

Deutsche Bank AG was fined $40,000 by the New York
Mercantile Exchange for violating position limits in natural
gas, Nymex said in a statement.

The bank held a position of 5,761.25 short contracts in
July 2011 Henry Hub Natural Gas Look-Alike Last Day Financial
Futures, 28 percent over the limit set by the exchange,
according to Nymex. The bank then increased its position to 34
percent over the limit on June 24, 2011, the exchange said.

Amanda Williams, a spokeswoman for Deutsche Bank in New
York, declined to comment on the fine.

Oslo Bourse Penalizes Unexecuted Orders From Automated Trading

Oslo’s stock exchange will introduce a fee designed to
limit computer-generated orders after equity strategies based on
mathematical models boosted the number of withdrawn trades and
clouded market transparency.

The fee, which will be enforced starting Sept. 1, will
apply to any order exceeding 70 for each executed trade and will
mainly target “orders which are canceled or changed within a
second, without contributing to improving pricing or volumes,”
Oslo Boers ASA said in a statement yesterday. The exchange will
charge 0.05 krone ($0.01) for every unexecuted order exceeding
the 1:70 ratio.

Trading based on mathematical models, known as algorithmic
and high-frequency trading, has come under scrutiny after a May
2010 crash that briefly erased $862 billion from the value of
U.S. shares. Traders and other professional investors withdrew
bids as the selloff worsened, according to a September 2010
report from the Securities and Exchange Commission and the
Commodity Futures Trading Commission.

Nasdaq OMX Group Inc., which manages 75 percent of all
Nordic stock trading, presented a similar move in September
2011. The exchange, which runs the Copenhagen, Helsinki,
Reykjavik and Stockholm bourses, introduced a 1:250 trade-to-order ratio fee to protect investors against what it called
malfunctions in the market.

Morgan Stanley Said to Tell Brokers It Will Fix Facebook Orders

Morgan Stanley Smith Barney, the world’s biggest brokerage,
told its financial advisers yesterday that it will adjust prices
on a few thousand client trades of Facebook Inc., according to a
person on the conference call.

The company also told brokers that limit orders to sell
shares for at least $43 each after the social network’s initial
public offering won’t be filled because of low volume at that
price range on May 18, said the person, who requested anonymity
because the call was private. Morgan Stanley Smith Barney told
brokers May 23 it was reviewing pricing and execution of orders,
according to a memo obtained by Bloomberg.

Nasdaq Stock Market trade confirmations were delayed and
some orders may have been mishandled by the exchange. The IPO
was marred on the first trading day when Nasdaq OMX Group Inc.
was overwhelmed by order cancellations and updates that delayed
trading in Facebook shares. The U.S. Securities and Exchange
Commission said it will conduct a review.

Facebook’s underwriters had gains of about $100 million
through their work to stabilize the share price since the IPO, a
person familiar with the matter said May 23. Morgan Stanley will
use some of the gains to reimburse clients who lost money
because of glitches in trade execution, the person said.

Courts

MasterCard Loses Court Challenge Over Cross-Border Card Fees

MasterCard Inc. lost a court challenge seeking to overturn
a European Union decision that the company’s cross-border card
fees violated antitrust rules.

The EU’s General Court yesterday backed the European
Commission’s decision that MasterCard unfairly inflated the
transaction fees paid by retailers for processing payments.

MasterCard’s “approach tends to overestimate the costs
borne by the issuing banks and, moreover, inadequately to assess
the advantages which merchants derive from that form of
payment,” the Luxembourg-based tribunal said in the ruling.

The second-biggest card network, supported by banks
including HSBC Holdings Plc and Royal Bank of Scotland Group
Plc, argued the so-called multilateral interchange fees were
crucial for sharing the costs of debit and credit card payments.
The case tested whether such levies are unfair to retailers and
customers and could be a road-map for national regulators to
pursue their own complaints.

Without the fees, “merchants would be able to exert
greater competitive pressure on the amount of costs they are
charged for the use of payment cards,” the court said.

MasterCard said it will appeal the ruling to the EU’s
highest court. Yesterday’s decision “will ultimately make
payments more expensive for consumers” by upsetting a system
that shares costs between banks, retailers and shoppers, the
Purchase, New York-based company said in an e-mailed statement.

The case is: T-111/08, MasterCard and others v. European
Commission.

For more, click here.

Interviews

Farzad, Brown Weigh Facebook IPO and Regulatory Reforms

Amid allegations of selective disclosure of information and
technical problems on the Nasdaq Stock Market, Facebook Inc.’s
initial public offering has led to a flurry of litigation.

According to Roben Farzad and Josh Brown, the missteps are
unlikely to lead to any meaningful regulatory reform given how
much less frequent IPOs are today, as well as other factors.
Farzad is a senior writer at Bloomberg Businessweek and Brown is
a financial adviser at Fusion Analytics.

They talked with Bloomberg Law’s Lee Pacchia.

For the video, click here.

Levitt Says Nasdaq, Bankers ‘Tainted’ by Facebook IPO

Arthur Levitt, former chairman of the U.S. Securities and
Exchange Commission and senior adviser to Goldman Sachs Group
Inc., says “there are lots of people to point the finger at”
in the initial public offering of Facebook Inc. Levitt talks
with Bloomberg’s Ken Prewitt and Tom Keene on Bloomberg Radio’s
“Bloomberg Surveillance.”

For the audio, click here, and for more, click here.

JPMorgan Needs ‘Independent Assessment,’ Johnson Says

Simon Johnson, a professor at the Massachusetts Institute
of Technology and a former economist at the International
Monetary Fund, talked about JPMorgan Chase & Co.’s $2 billion
trading loss and the need for an independent investigation into
the firm’s practices.

BOE’s Clark Says Bank Rules Front-Loaded More Than Intended

Bank of England interim Financial Policy Committee member
Alastair Clark said policy makers may have ended up “front-loading” new rules more than planned in an environment that
remains threatening.

“In our international regulatory initiatives, we may
inadvertently have ended up front-loading the regulatory
response more than was intended,” Clark said in a speech in
London yesterday. “Even though, for example, extended
timetables were set for the implementation of Basel III, once
the end point was announced market pressures have tended to
foreshorten the effective period of adjustment.”

Clark said that doesn’t alter the direction taken by
regulators, as “there are clearly still significant
vulnerabilities in the international banking system and the
environment remains very threatening.”

Global regulators’ tougher capital requirements, known as
Basel III, could see the world’s biggest banks raise about $566
billion of common equity to meet rules by 2019, analysts at
Fitch Ratings said on May 17.